Tools and Data for Decision Making: Hospitality Metrics & KPIs
By Robert O'Halloran
I have been teaching with metrics for a long time. Before teaching, I worked for a consulting firm and was immersed in the world of hospitality metrics. Prior to that, as a restaurant manager on both coasts, I focused, for managers and owners, on food and labor costs. In the old days, restaurants were very food-cost oriented. I can calculate food cost percentage, but it reminds me that unless you lock the front doors of your restaurant and serve no one, the restaurant will incur food costs as a function of the food they sell.
The questions for metrics are, what do cost percentages mean? Similarly, on the lodging side, what do occupancy percentage, REVPAR, and ADR mean? and how does it help a manager, leader, or owner, make decisions? The premise here is that there are standards set on costs and revenues that enable the creation of metrics. Therefore, the use of metrics requires planning and standard setting to enable managers to be aware of the success of their efforts.
I thinking that lowering food costs for any restaurant is achievable, but will the action plan to accomplish this be the right way to do it? For example, if a standard was set for a 35 percent menu food cost percentage, then how can food cost be lowered? Start by thinking about purchasing and portion sizes. Smaller portion sizes can create less food costs. If managing by menu, what does the food specification say about product quality? Would a less expensive cut of meat make the same entree, in terms of quality? Are the standards and decisions in the best interest of the guest and the restaurant?
Keeping metrics reasonable, attainable, honest, and transparent allows everyone on the team to work towards a great price and quality combination that produces value, a value that is driven by understanding guest behavior and preferences and booking trends. Additionally, there are also opportunities for integrating hotel operations, from room bookings to guest services. Metrics can also support marketing decisions and the creation of decision-making tools for targeted campaigns, promotions, and loyalty programs.
The argument is that by tracking your metrics, you will dramatically improve your business results. In general, a framework for your KPI and or metric goals should focus on:
- big priorities
- measurement methods
- specific targets or standards
- accurate data
- appropriate analysis techniques
- operational activities reports that incorporate online review scores that includes customer feedback forms/surveys, social media.
What Do You Want to Measure?
Plan your metrics and or KPI program. Define what is being measured for your operation and focus on key targets. The question is, are you using all your data? Was it collected effectively and efficiently? More is not always better; it is sometimes just more. If you are not operationally efficient, what can you measure? How precisely can you measure it and get results that will help you make effective and efficient decisions? Operationally, what efficiencies for energy, water, health and safety, control of room costs, and labor costs can be implemented?
In a marketing focus, looking at campaign data, guest satisfaction scores, and relevant social media?. If you don’t analyze the data you have, then what is the point? For marketing, remember the end goal is likely to be effective and efficient in all its efforts and ultimately increase your hotel’s image, brand, and social media presence.
Hospitality Metrics
Key performance indicators, or KPIs, are quantifiable metrics used to evaluate a company’s financial and operational effectiveness. Hospitality metrics can help companies identify trends, spot inefficiencies, maximize revenue and stay ahead of the competition. KPIs are metrics that business executives and managers, analysts, lenders, investors, and other interested parties use to gauge a company’s financial health, operational efficiency, and success. By tracking and analyzing KPIs, organizations are able to quantify their performance and gain data-driven insights that help them make better-informed decisions, boost productivity, reduce costs, increase profitability, and improve customer service. How you measure your success depends on what targets are set.
Hospitality KPIs are focused on the unique features and goals of the hospitality industry, such as the average cost, revenue, and profit of an occupied hotel room. For example, by regularly monitoring KPIs, hospitality businesses can optimize what’s working, identify areas in need of improvement and benchmark their performance against that of competitors. Modern businesses also leverage advanced technologies and integrated platforms to track, analyze and report KPIs in real-time, empowering them to strategically adapt to changing market conditions and evolving customer expectations.
KPIs can measure efficiency, productivity, and customer loyalty. Decision-makers use these findings to better understand demand patterns, decide resource allocation, schedule staff, and develop marketing campaigns. I constantly tell my students to return to the original equations: occupied room nights / available room nights = occupancy percentage, ADR = room revenues / occupied room nights. These are direct measures of the number of rooms sold over a period of time and, on average, what the rate was charged. You also use metrics to create other metrics, REVPAR= Room Revenues / Rooms available. or Occupancy % X ADR.
Additional metrics assembled from multiple sources might include:
- Average Length of Stay (ALOS)= Total occupied room nights / Number of bookings.
- Cost Per Occupied Room (CPOR) = Total costs of room operations / Number of rooms sold.
- Gross Operating Profit Per Available Room (GOPPAR) = Gross operating profit / Total number of available room nights
- Total Revenue Per Available Room (TRevPAR) = Total net revenue / Number of available rooms
- Transient Segment Mix
- Group Mix (revenue) = Group revenue / Total revenue x 100
- Loyalty Mix (bookings) = Loyalty program bookings / Total bookings x 100
- Channel Mix (bookings) = Bookings from channel / Total bookings x 100
The number of metrics and KPIs appears to be unlimited. Included here are more metrics that are discussed throughout the lodging periodicals and journals . Listed here by category:
Guest Satisfaction:
- Net Promoter Score (NPS) and online reviews, gauge guest experiences and areas of improvement.
- Cost per acquisition (CPA) helps in understanding the cost involved in acquiring a customer, essential for budgeting and marketing strategies.
- Distribution channel performance is vital to know which channels (like OTAs and direct bookings) are most profitable.
- Demographic segmentation -- grouping by age, gender, ethnicity, occupation, income, religion, etc.;
- Psychographic segmentation -- grouping by lifestyle, interests, values, etc.
- Geographic segmentation -- grouping by geographic location, city vs rural origin, etc.
- Behavioral segmentation -- grouping based on the previous customer behavior.
Revenue Metrics:
- TrevPEC - Total revenue per client
- NRevPAR - Net revenue per available room considers the expenses incurred by you in order to fill your rooms
- RevPOR - Revenue per occupied room. Also, by department e.g., food and beverage
- ReRTI - RevPAR Room Type Index
- RevPAM - Revenue per available mete r or in the U.S. per square foot.
- Sales volume o Daily sales o Sales per employee
Profit metrics:
- GOP - Gross operating profit is simply a calculation of your profits after acquisition costs have been deducted
- NOI - Slightly different to GOP, Net operating income calculates your income after operating expenses have been deducted but before interest and taxes have been applied
- CPOR - Cost per occupied room lets you identify the average cost per occupied room to give you an idea of how healthy your cost of acquisition is. How much are you spending to secure a booking?
Operations:
- MPI - Market penetration index.
- ARI - Average rate index for rates instead of your occupancy. Divide your ADR by the competitive market’s ADR
- Cost of Goods Sold (COGS)
- Cost per customer
- Reduce and properly dispose of food waste (Sustainability Factors)
- Inventory turnover rates
Marketing:
- MCPB (marketing cost per booking)
- Sentiment score on TripAdvisor
- DRR (direct revenue ratio): This metric measures the percentage of online revenue coming in directly vs expensive third-party channels.
- Website conversion rate: This calculates the number of unique website visitors that convert into bookings.
- Segmentation: Group, Business, Tourist and Leisure, etc.
- Labor costs
- Employee effectiveness
- Employee hours: ensure you allocate the right number of hours to each task.
- Thoughtful staff scheduling: plan employee schedules carefully to match demand.
- High employee satisfaction: a content and motivated team tends to perform better. Their satisfaction levels also influence staff turnover.
- Employee turnover rate. A Sample: Advanced Metrics Hoteliers Should Track
- Guest Acquisition Cost (GAC) measures the cost of acquiring new guests.
- Repeat Business Rate indicates the percentage of guests who return to the hotel.
- Net Promoter Score (NPS) measures customer loyalty and satisfaction.
- Cost Per Available Room (CPAR) measures the total cost of operating a hotel per available room.
- Customer Lifetime Value (CLTV) estimates the total revenue a customer will generate.
- Social Media Engagement Rate measures the level of interaction with a hotel’s social media content.
- Online Reputation Score reflects a hotel’s overall online reputation.
Labor Cost Percentage(s)
- Demand forecasting accuracy
- Labor Staffing Guides per department
- Monitor overtime for all
- Housekeeping- the largest department per number of employees. Streamline Room Assignments: Group room assignments by location to reduce time spent moving between rooms.
Monitor Energy Usage: Think about sustainability
Monitor Water Usage: Think Sustainability
Plus other metrics to consider.
- Bounce rate that shows the percentage of visitors who leave your website quickly without doing anything.
- CTR or click-through rate is the percentage of users who actually clicked on your link after seeing it in the search results or an online ad.
- New visitors vs returning visitors shows the ratio of first-time visitors and the ones that have already visited before.
- Conversion rate is the most important measurement of success as it shows the share of people that actually made a booking through your site.
- Time on site or Average session duration is how much time visitors spend on your website.
- Link sharing when the link to your website is shared on social media, blogpost, or other sites, is the ultimate stage of engagement and is a sign that you’re doing a good job!
Why metrics? Because not only is the old saying “If you can’t measure it, you can’t improve it” true, but visibility into your metrics allows you to identify WHERE you can make the easiest and most impactful improvements. By tracking your metrics, you will dramatically improve your business results. The old saying is “ABCD” Always be collecting data! There is a reason for that. Data can drive decision direction and provide the justifications needed for decisions made. If the use of data across the board in all departments seems daunting, then start the KPI and metric management programs in smaller and specific content chunks. A little bit at a time and then more as you hone your sophistication with metric management.
Teaching & Training with Metrics for Decision Making
I have previously noted some of the projects in which our students are engaged. This past fall, they worked extensively on hotel feasibility studies that examined the supply and demand for lodging in a rural locations/destination. That destination is looking to have a commercial room supply to support their area tourism and keep tourism dollars spent in their county. We have generally labeled these efforts as “regional transformation.” The implication is that a lodging development could be a catalyst for business. The student projects are hospitality data and metric-driven.
To help illustrate their metric education, a couple of sample graphs utilized in this process are shared below. These graphs detail multiple metrics that were researched, analyzed, and applied in teaching scenarios and in the student preparation and delivery of their feasibility study projects. The intent is to enhance student decision-making skills and enable them to enhance their familiarization with data analysis to create metrics and set standard KPIs. These skills help prepare students and soon-to-be graduates to transition into the hospitality leadership workforce.
For example, below is a Competitive Set typically selected by student groups based on a destination market and land identified as zoned for commercial development. This example includes five competitors and the number of available rooms, the days open to express available room nights on an annual basis, occupancy percentage, average daily rate, calculated room revenues, REVPAR, and market segment mix for commercial, group and tourist segments. For the student groups, they are charged with selecting the competitors based on a set of criteria, and then research the occupancy percentage and other figures both by online search and interviews.
When the table is completed for each hotel, market totals are then created for the same metrics. These totals are often weighted averages as they are weighted by the number of rooms in each competitive hotel and the number of days they are open. Also, when the totals are complete, the indices for each metric are calculated, illustrating how each hotel is performing in relationship to the market as a whole. In this example, the metrics researched and assembled include the number of rooms, daily and annually, occupancy percentage, average daily rate, and mix of segment demand (Commercial, Group and Tourist). Metrics that are calculated also include all market totals and indexes.
Students are made aware that the competitive set table provides the base of supply and demand for the feasibility project. This emphasizes the importance of selecting a comp set and researching the data shared by operators and sales personnel. Another key item to note is that all the analysis is connected, and a change in the first table will impact future analysis on this project. A student’s metric adventure is off and running.
Competitive Set
Example 2: Forecast Penetration
Also, further into the feasibility analysis process, students assemble a Forecast Penetration table, as displayed below.
At this juncture, students have estimated growth rates and forecasted annual demand through the first five years of operation for a proposed hotel. On the table below, the table is assembled starting with the years of operation and the fair share of supply, noting that room supply from the Comp Set is brought forward and adjusted to add the newly proposed hotel. The example below is for a new 50-room property. Fair share of supply is calculated to be 10.2 percent, indicating the number of rooms the new hotel represents in the market.
Then the table is populated with the room night demand for each year in each segment. The key for the student researchers is to estimate the penetration rate for the new hotel in each segment in each year. This requires knowledge of market performance, a comparison of each hotel in the market and identifying who the leaders are in the market in each segment. The analysis integrates historical penetration data and estimates of the competitiveness of the proposed hotel versus the market.
For example, in the commercial segment penetration rate is 110 percent in year one and climbs to 125 percent in year five, illustrating a strong and aggressive business segment for the hotel. Also noted is the market share for each segment to compare with the segment percentages for the new hotel (mix of demand). Finally, based on the total demand captured and total market demand, market occupancy and new hotel occupancy are forecasted. Additionally, the occupancy indices are calculated to compare hotel performance with the market.
Additionally, some studies are inclusive of other revenue streams and segments that are, in some cases, atypical. One course project was set in a small (14 rooms) rural location and involved the renovation of a historic site that added to the complexity of the project. In addition to a small number of rooms, students created and recommended other revenue streams that included rental, retail, and camping.
The point here is that students become metric literate and also begin to think about justifications for their decisions, as well as what other data, KPIs and metrics they can create, find and use. There is obviously more to a feasibility study that engages the students and enhances their analytical skills.
Going Forward
Performance is paramount in the hospitality industry, and whether measuring success against yourself, the competition or a specific segment of the market, the process involves foundational historical metrics. STR Global states that benchmarking is the foundation of any decision making. The focus on historical data centers you to what is working and where opportunities exist. Hotel benchmarking involves three key top-line performance metrics: occupancy, average daily rate (ADR) and revenue per available room (RevPAR).
STR Global shares some examples of the use and application of this process.
- General managers use day-of-week splits to gain a holistic view of the market.
- General managers and individual owners work with their revenue managers to set a strategy for segmentation and rate mix.
- Revenue managers inform their pricing approach based on historical occupancy and competitive market trends.
- Ownership representatives assess the competitiveness of their portfolio.
- Finance departments track daily/weekly/monthly changes in performance across all KPIs and their relative impact to profitability.
- Portfolio representatives evaluate property success, combine historical metrics with forward-looking to approve property pricing strategies, set property budget targets, and measure portfolio competitiveness.
- Marketing teams build and adjust promotional campaigns.
This article has shared a variety of metrics for use in decision making and the following link -- 40 Essential Hotel Metrics to Monitor for Success -- lists some of these and more.
Data is everywhere and managers, leaders and owners of hospitality operations will benefit from utilizing metrics and all KPIs. A process recommendation is to plan your metric and KPI program, decide what you will measure, set standards and measurement methods, and decide the array of metrics (research) that will be optimally useful to a lodging or hospitality operation.
